Researchers at the Federal Reserve and Penn State University released a preliminary research paper this year that finds a troubling correlation between rising student loan debt and the number of new small businesses. The results are presumably still being tested and retested, but the initial conclusions are glum: rising student loan burdens means that fewer people are starting businesses.
And it's a lot fewer people. For every standard deviation rise in student loan debt, there's an average 25% drop in new small businesses. Does that mean your dream of becoming an entrepreneur is lost? Not necessarily -- you might just need to revise your plans a bit.
Either way, you should be concerned about this
Let's review the numbers. In 2000, student loans accounted for 2.9% of consumer debt. In 2010, they'd ballooned to 10%. A report from 2013 found that fully 17% of loans are delinquent, and another 44% weren't being repaid yet because they were either in deferral, forbearance, or a grace period.
What happens when those loans come home to roost? Even fewer entrepreneurs? A trail of financially imperiled ones?
While the researchers were looking at aggregate data, and not what individuals were doing, it's a troubling finding -- even if you don't want to start your own business. In the U.S. small firms account for 99% of all businesses and about 60% of new private sector jobs. Fewer small businesses, in other words, could eventually translate into fewer employment options.
Of course, this is even more troubling if you do want to start a business. The researchers point out that being able to access credit is an important part of funding a new venture, and if you have loans you might have very limited options. Or you might be so overwhelmed by your monthly payments that you can't even fathom walking away from your job to pursue your dream (the study didn't cover that).
So what do you do if you have student loans and you want to start your own business?
First of all, do not ignore your loans
The first and most important thing you need to do is the following: do not ignore your loans and pretend that everything is going to be OK one day if you just focus on other things for a while. Entrepreneurs are a notoriously optimistic bunch, but the rules are the rules, and the rules say that those loans will follow you around for the rest of your life until they're paid. Forbearances will only postpone the inevitable and make it more expensive than it needs to be.
So, what should you do?
Prepay your loans while you have a job
The least stressful course of action would be to pay off the loans before you strike out on your own. I did not do this, which is why I strongly suggest that you consider it. (I decided to become a writer and entrepreneur with, essentially, a handful of savings, a few existing clients, a mountain of business school debt, some credit cards, and a pathological level of enthusiasm. I don't regret this character-building exercise, but it has come with its share of stress.)
Raid your paycheck to prepay your loans like it's going out of style. You'd be amazed at how little you can live off of at the end of the day, and each little bit that you can add to your loan payment means a little bit more freedom later.
The question is, of course, whether to prepay and save at the same time, or just prepay and then save. I'd argue this largely depends on your constitution and your tolerance for employment -- that is, your timeline. You might want to look at a prepayment calculator to see how many years of payments you're saving yourself under different schemes, not to mention figure out how much money you want to have in savings before saying goodbye to the workforce.
In the meantime, start your business on the side
Plenty of businesses begin as part-time gigs, and it's actually a great way to test ideas before committing to a long-term plan. Whatever your concept, do it part time and try to build the thing a little each day -- over evenings, early mornings, and weekends. You will be amazed at how much you can accomplish without leaving your job.
Businesses tend to grow slowly, so you might really benefit from this extra time. And if you start raking in the money quickly, congratulations! You can pay the debt faster and work on your business full time even sooner.
Having to work on building your dreams at odd hours will also test your mettle. How willing are you, really, to make it happen?
What if you still have loans, but can't stand another day in the workforce?
Well, if you're that impatient you presumably have some level of capital to finance your great leap forward, so use that to get started and keep paying your loans.
If you have federal loans, you can explore one of many repayment options, including extending your payment period or opting for income-based repayment. Please note that these might involve spending more in the long run. Then absolutely minimize your costs to make whatever savings you have last as long as possible. You would be amazed at how slowly even incredibly brilliant ideas can take to come to fruition.
The one benefit of this method is that desperation can be a powerful motivator. It's also an extremely stressful motivator, though, so keep that in mind. Either way, remember: even if you really hit the wall, do not ignore your loans. You have options, but default shouldn't be one of them.
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